Korean Firms Face Funding Difficulties as Rates Rise & Markets Shift

South Korean companies are facing increasing difficulty securing funding, despite a robust stock market. Rising interest rates, shifting investment patterns, and potential legislative changes are creating a challenging financial landscape for businesses across the country.

Funding Challenges Emerge

Last year, SK Telecom and KCCGlass postponed planned bond issuances – a common method for companies to raise capital – due to concerns about increased borrowing costs and waning investor demand. HDC and SK On, who did proceed with bond offerings, were forced to scale back their initial plans, issuing 500 billion and 1,000 billion Korean won respectively, compared to their original targets of 1,000 billion and 1,500 billion won. This trend has continued into 2024, with LG Energy Solution tentatively delaying a bond issuance of over 1 trillion won.

Atypical Market Conditions

Typically, January sees an increase in both company bond issuance and corporate loan activity. However, this year has bucked the trend. Last month, net bond issuance totaled 426.1 billion won, the lowest level since 2017. This represents a significant decrease from 5.4991 trillion won in January 2024 and 1.8252 trillion won in January 2023. Corporate loan growth has also slowed, with the five major banks – KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup – reporting a 2.6276 trillion won increase in corporate loans in January, less than half the 5.1003 trillion won increase seen in January of the previous year.

Did You Know? In January, the net issuance of corporate bonds in South Korea reached 426.1 billion won, marking the lowest figure since 2017.

While the KOSPI continues to reach record highs, investor funds are increasingly flowing into the stock market, diverting capital away from traditional debt instruments. This shift is occurring even as global bond markets, excluding South Korea, are experiencing record issuance levels. Last month, global bond issuance reached approximately 930 billion dollars, surpassing the previous January high of 842 billion dollars in 2024. US investment-grade corporate bond issuance rose by around 12% year-over-year to 208.4 billion dollars.

Rising Interest Rates and Economic Concerns

Interest rates are a primary driver of these challenges. The corporate loan interest rate reached 4.16% in December 2023, up 0.06 percentage points from the previous month. Large corporations saw a slight increase to 4.08%, while small and medium-sized enterprises (SMEs) experienced a more substantial rise to 4.24%. Even loans secured with government guarantees – considered the safest type of corporate lending – now exceed 4%. Company bond rates have also been climbing since November 2023, coinciding with the stabilization of South Korean national bond yields following the Bank of Korea’s decision to hold its benchmark interest rate steady. A subsequent rate hike by the Bank of Japan in December further fueled the increase.

Expert Insight: The convergence of rising interest rates, shifting investor preferences, and external economic uncertainties creates a complex environment for South Korean companies seeking to raise capital. This situation could lead to a tightening of credit conditions and potentially constrain investment and growth.

As of February 5th, the yield on a three-year ‘AA-’ rated corporate bond stood at 3.724%, the highest level in a year and four months. The strong performance of the KOSPI is also contributing to the pressure on bond yields, as investors favour equities over bonds in a bull market.

Potential Future Developments

The current environment suggests that securing funding will remain difficult for companies in the near future. Funds are leaving low-interest deposits as they move into the KOSPI, increasing banks’ funding costs and potentially leading to further increases in loan rates. Exchange rate volatility also discourages banks from extending corporate loans. A 10-won fluctuation in the exchange rate can reduce a bank’s Common Equity Tier 1 (CET1) ratio – a measure of its capital adequacy – by 0.01 to 0.03 percentage points.

Recent discussion from President Lee Jae-myung regarding a potential supplementary budget is also contributing to rising national bond yields. Funding such a budget would require issuing additional national bonds, potentially driving down bond prices. The proposed revision to the Commercial Code, aimed at reducing capital, could exacerbate the financial pressures on companies.

The economic organizations are expressing concern that the proposed revision to the Commercial Code, specifically regarding the treatment of non-voluntary share repurchases, could further strain corporate liquidity. According to Jeong Woo-yong, Policy Director of the Korea Listed Companies Association, 933 out of 2417 listed companies hold shares that would be subject to cancellation under the proposed changes, potentially leading to capital reduction and increased financial burdens.

Frequently Asked Questions

What is driving the difficulty companies are having securing funding?

Rising interest rates on both loans and bonds, coupled with a shift in investment towards the stock market, are making it more expensive and challenging for companies to raise capital.

What impact could the proposed changes to the Commercial Code have?

The proposed changes, which could lead to a reduction in companies’ capital base, could potentially increase financial pressure and make it harder to secure loans.

How is the global bond market performing compared to South Korea?

Global bond markets, excluding South Korea, are experiencing record issuance levels, while South Korea is seeing a significant decline in net bond issuance.

As companies navigate these challenges, will they be able to maintain investment and growth, or will tighter credit conditions lead to economic slowdown?